DAL – How Much Higher Can Delta Fly?

A revived airline looks to take off again

Without even a hint of turbulence, Delta Air Lines (DAL) shares have soared well above cruising height in 2013, amassing 134% gains along the way. The question now is how high and how far can it possibly go before running out of gas?

I say, the sky’s the limit.

Here’s an airline whose shares took an 80% nosedive in 2005 that resulted in an ousting from the S&P 500 and a pathetic share price of $1.40. It shook that off and merged with Northwest Airlines three years later. Delta has been solidly in the black to this very day.

Much of Delta’s post-merger success has been attributed to replacing a fleet of older aircraft and redirecting flights between more profitable cities. More passengers, improved operating margins and revenue boosted the airline’s earnings.

Revenue up, fuel costs down

Delta’s recent success stems from a similar set of metrics. Delta’s third-quarter report showed a formidable jump in passenger revenue per available seat mile both domestically and in its trans-Atlantic market. Fuel costs fell below $3 per gallon, contributing to healthy cost containment for the airline. For the quarter, Delta earned $1.37 billion or $1.59 a share, up from $1 billion, or $1.23 a share, a year earlier. After one-time items, adjusted earnings were $1.41. Revenue climbed 5.7% to $10.49 billion.

The S&P 500 (INX) recently welcomed Delta back to the index with open arms, a move that send its stock up 15% the following week.

As we near the end of 2013 and head into 2014, Delta is continuing to add to its already impressive resume. It (and JetBlue (JBLU) ) was approved by the F.A.A. to allow passengers to use portable electronic devices above 10,000 feet. By the end of this year, it will own the largest Wi-Fi enabled fleet, including more than 800 aircraft, and the only U.S. domestic carrier with personal on-demand entertainment at every seat on all long-haul international flights.

Seattle presence

Already with an industry-leading global network that offers flights to 314 destinations in 58 countries on six continents, there’s more to come.

Delta recently announced expanded service out of Seattle, one of its fastest-growing global gateways, directly in competition with Alaska Airlines. Last month, Delta revealed a new route to San Francisco and expanded flights to Los Angeles and Las Vegas. Delta has also added Seoul, Hong Kong and London to its international routes.

In addition to spending $5.6 billion for 40 new Airbus jets it ordered last week, Delta is investing more than $3 billion in other enhancements to the customer experience. It appears to be spending its money wisely.

“Fundamentally, the carrier is nicely positioned in a partially consolidated industry, given the carrier’s success in developing the New York market, and subsequently its transatlantic presence, given a joint venture with Virgin Atlantic,” wrote Dan McKenzie, an analyst with Buckingham Research Group, in a Sept. 10 note to clients. He has a $30 target for Delta.

What else could the airline possibly cook up for shareholders? A dividend? You bet. Delta is the only one of the Big 4 legacy carriers that has started paying one, albeit a smidge under 1%.